<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended June 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to
______________________.
Commission file number 0-25886
GARDEN FRESH RESTAURANT CORP.
(Exact name of registrant as specified in its charter)
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to
______________________.
Commission file number 0-25886
GARDEN FRESH RESTAURANT CORP.
(Exact name of registrant as specified in its charter)
Delaware 33-0028786
(State or other jurisdiction of incorporation (I.R.S. Employee
or organization Identification No.)
17180 Bernardo Center Drive, San Diego, CA 92128
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (858) 675-1600
_______________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
The number of shares of Common Stock, $.01 par value, outstanding as of August
4, 2000 was 5,654,311. There are no other classes of common stock.
<PAGE> 2
GARDEN FRESH RESTAURANT CORP.
FORM 10-Q
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1: Unaudited Financial Statements
Balance Sheet at September 30, 1999 and
June 30, 2000 3
Statement of Operations for the three and nine months ended
June 30, 1999 and June 30, 2000 4
Statement of Cash Flows for the nine months ended
June 30, 1999 and June 30, 2000 5
Notes to Unaudited Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3: Quantitative and Qualitative Disclosures About Market Risk 15
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities 16
Item 3: Defaults Upon Senior Securities 16
Item 4: Submission of Matters to a Vote of Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 16
<PAGE> 3
Balance Sheet
(Dollars in thousands)
September 30, 1999 June 30, 2000
(Unaudited)
Assets
Cash and cash equivalents $ 911 $ 1,634
Inventories 4,277 6,190
Other current assets 1,014 2,400
Deferred income taxes 460 1,468
---------- ---------
Total current assets 6,662 11,692
Property and equipment, net 104,716 128,554
Intangible and other assets 3,240 1,756
---------- ---------
Total assets $ 114,618 $ 142,002
========== =========
Liabilities and Shareholders' Equity
Accounts payable $ 4,075 $ 6,352
Current portion of long-term debt 7,512 9,891
Accrued liabilities 6,375 8,901
---------- ---------
Total current liabilities 17,962 25,144
Accrued rent 1,128 1,092
Deferred gain on sale - leaseback of property - 129
Deferred income taxes 1,479 3,453
Deferred compensation 514 872
Bank line of credit 5,001 10,510
Long-term debt, net of current portion 21,685 30,364
Shareholders' equity:
Common stock, $.01 par value; 12,000,000
shares authorized at September 30, 1999
and June 30, 2000, respectively; 5,629,405
and 5,654,211 issued and outstanding at
September 30, 1999 and June 30, 2000,
respectively 56 56
Paid-in capital 59,240 59,500
Retained earnings 7,553 10,882
---------- ---------
Total shareholders' equity 66,849 70,438
---------- ---------
Total liabilities and shareholders' equity $ 114,618 $ 142,002
========== =========
See notes to unaudited financial statements.
<PAGE> 4
GARDEN FRESH RESTAURANT CORP.
STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
1999 2000 1999 2000
<S> <C> <C> <C> <C>
NET SALES $ 34,055 $ 42,657 $ 95,403 $ 119,142
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales 8,650 10,838 24,547 30,104
Restaurant operating expenses:
Labor 10,236 13,123 28,845 37,489
Occupancy and other expenses 6,944 8,634 20,134 25,146
General and administrative expenses 1,894 2,562 5,833 7,579
Restaurant opening costs - 1,040 - 2,086
Depreciation and amortization expenses 2,465 2,502 6,927 6,949
----------- ----------- ----------- -----------
Total costs and expenses 30,189 38,699 86,286 109,353
Operating income 3,866 3,958 9,117 9,789
Interest income 14 37 71 104
Interest expense (456) (928) (1,282) (2,460)
Other income (expense), net (55) 29 (122) 80
----------- ----------- ----------- -----------
Income before income taxes and
cumulative effect of accounting change 3,369 3,096 7,784 7,513
Provision for income taxes (1,314) (1,202) (3,047) (2,951)
----------- ----------- ----------- -----------
Income before cumulative effect of
accounting change 2,055 1,894 4,737 4,562
Cumulative effect of change in
accounting for startup costs, net of
income tax benefit of $800 - - - (1,233)
----------- ----------- ----------- -----------
Net income $ 2,055 $ 1,894 $ 4,737 $ 3,329
=========== =========== =========== ===========
Basic net income per share:
Income before cumulative effect
of accounting change $ 0.37 $ 0.34 $ 0.85 $ 0.81
Cumulative effect of change in
accounting for startup costs - - - (0.22)
----------- ----------- ----------- -----------
Net income $ 0.37 $ 0.34 $ 0.85 $ 0.59
=========== =========== =========== ===========
Shares used in computing
basic net income per share 5,558 5,653 5,587 5,644
=========== =========== =========== ===========
Diluted net income per share:
Income before cumulative effect
of accounting change $ 0.35 $ 0.33 $ 0.81 $ 0.78
Cumulative effect of change in
accounting for startup costs - - - (0.21)
----------- ----------- ----------- -----------
Net income $ 0.35 $ 0.33 $ 0.81 $ 0.57
=========== =========== =========== ===========
Shares used in computing
diluted net income per share 5,880 5,761 5,881 5,809
=========== =========== =========== ===========
<FN>
See notes to unaudited financial statements.
</FN>
</TABLE>
<PAGE> 5
GARDEN FRESH RESTAURANT CORP.
STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
June 30, 1999 June 30, 2000
OPERATING ACTIVITIES:
Net income $ 4,737 $ 3,329
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of accounting change,
net of income taxes - 1,233
Depreciation and amortization expenses 6,927 6,949
Loss on disposal of property 130 275
Provision for deferred income taxes 515 1,766
Tax benefit from exercise of stock options 561 9
Gain on sale - leaseback of property - 130
Amortization of deferred gain on sale -
leaseback of property - (1)
Changes in operating assets and liabilities:
Increase in inventories (289) (1,913)
Increase in other assets (1,643) (1,386)
Increase in accounts payable 1,805 1,019
Increase in accrued liabilities 2,988 2,526
Decrease in accrued rent (86) (36)
Increase in deferred compensation 202 358
-------- --------
Net cash provided by operating activities 15,847 14,258
-------- --------
INVESTING ACTIVITIES:
Acquisition of property and equipment:
New restaurant development (22,962) (29,089)
Existing restaurant additions (1,856) (3,142)
Increase in intangible and other assets (1,930) (585)
Proceeds from sale - leaseback of property - 2,463
-------- --------
Net cash used in investing activities (26,748) (30,353)
-------- --------
FINANCING ACTIVITIES:
Net borrowings under line of credit 3,355 5,509
Proceeds from long-term debt 10,310 16,600
Repayment of long-term debt (4,514) (5,542)
Net proceeds from issuance of common stock 1,425 251
Repurchase of common stock (1,907) -
-------- --------
Net cash provided by financing activities 8,669 16,818
-------- --------
Net increase (decrease) in cash and cash
equivalents (2,232) 723
Cash and cash equivalent at beginning of period 3,382 911
-------- --------
Cash and cash equivalent at end of period $ 1,150 $ 1,634
======== ========
See notes to unaudited financial statements.
<PAGE> 6
GARDEN FRESH RESTAURANT CORP.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. UNAUDITED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by Garden Fresh
Restaurant Corp. (the "Company") without audit and reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair statement of financial position and the
results of operations for the interim periods. The statements have been
prepared in accordance with the regulations of the Securities and Exchange
Commission and do not necessarily include certain information and footnote
disclosures necessary to present the statements in accordance with generally
accepted accounting principles. For further information, refer to the
financial statements and notes thereto for fiscal year ended September 30, 1999
included in the Company's Form 10-K.
2. NET INCOME PER SHARE
Basic net income per share is computed based on the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed on the weighted average number of common shares and potential
common shares, which includes options under the Company's stock option plans
computed using the treasury stock method and common shares which could be
issued under the Company's Employee Stock Purchase Plan.
Potential issuances of common stock of 108,000 and 322,000 shares for the
three month periods ended June 30, 2000 and 1999, respectively, and 165,000 and
294,000 shares for the nine month periods ended June 30, 2000 and 1999,
respectively, were used to calculate diluted earnings per share. There were no
reconciling items in calculating the numerator for basic and diluted earnings
per share for any of the periods presented. Options to purchase 498,000 and
182,000 shares of common stock for the three and nine month periods ended June
30, 2000 respectively were not included in the calculation of diluted net
income per share because the effects of these instruments were anti-dilutive.
3. ACCOUNTING CHANGE
Effective October 1, 1999 the Company adopted Statement of Position 98-5
"Reporting on the Costs of Startup Activities", (SOP 98-5) and began expensing
startup costs as incurred. Following are the pro forma effects on net income
assuming retroactive application of SOP 98-5.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000
<S> <C> <C> <C> <C>
Pro forma:
Net income $2,173 $1,894 $4,880 $4,562
Basic net income per share 0.39 0.34 0.87 0.81
Diluted net income per share $ 0.37 $ 0.33 $ 0.83 $ 0.78
Historical
Net income $2,055 $1,894 $4,737 $3,329
Basic net income per share 0.37 0.34 0.85 0.59
Diluted net income per share $ 0.35 $ 0.33 $ 0.81 $ 0.57
</TABLE>
4. PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
<PAGE> 7
5. SALE - LEASEBACK
In May 2000, the Company entered into a sale - leaseback transaction
whereby the Company sold and leased back the land and building for one
restaurant site in Beaverton, Oregon. The Company received net proceeds of
$2.5 million and recorded deferred gain of $130,000. The gain is being
amortized over the lease term of 20 years. The related lease is being
accounted for as an operating lease.
6. LINE OF CREDIT
In June 2000, the Company increased the funds available under its bank
line of credit from $10 million to $12 million. The line of credit matures on
December 31, 2001. The outstanding principal balance bears interest at the
prime rate or 20 basis points above LIBOR.
<PAGE> 8
GARDEN FRESH RESTAURANT CORP.
STATEMENT OF OPERATING DATA
ITEM 2: MANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The statements contained in this Form 10-Q that are not purely historical
are forward looking statements, including statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future.
Statements which use the words "expects," "will," "may," "anticipates,"
"believes," "intends," "planned," and "budgeted," are forward looking
statements. These forward looking statements, including statements regarding
the Company's expansion efforts and plans to open new restaurants, budgeted
capital expenditures and improved service and savings that may result from the
Company's distribution center are based on information available to the Company
on the date hereof, and the Company assumes no obligation to update any such
forward looking statement. It is important to note that the Company's actual
results could differ materially from those in such forward looking statements.
Among factors that could cause actual results to differ materially are the
factors set below under the heading "Business Risks." In particular, the
Company's expansion efforts and plans to open new restaurants and budgeted
capital expenditures could be affected by the Company's ability to locate
suitable restaurant sites, construct new restaurants in a timely manner and
obtain additional funds.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000
<S> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
COST AND EXPENSES:
Cost of sales 25.4% 25.4% 25.7% 25.3%
Restaurant operating expenses:
Labor 30.0% 30.8% 30.2% 31.5%
Occupancy and other expenses 20.4% 20.2% 21.1% 21.1%
General and administrative expenses 5.6% 6.0% 6.1% 6.4%
Restaurant opening costs 0.0% 2.4% 0.0% 1.7%
Depreciation and amortization expenses 7.2% 5.9% 7.3% 5.8%
----- ----- ----- -----
Total costs and expenses 88.6% 90.7% 90.4% 91.8%
----- ----- ----- -----
Operating Income 11.4% 9.3% 9.6% 8.2%
Interest income 0.0% 0.1% 0.0% 0.1%
Interest expense (1.3%) (2.2%) (1.3%) (2.1%)
Other income (expense), net (0.2%) 0.0% (0.1%) 0.1%
----- ----- ----- -----
Income before income taxes and cumulative
effect of accounting change 9.9% 7.2% 8.2% 6.3%
Provision for income taxes (3.9%) (2.8%) (3.2%) (2.5%)
----- ----- ----- -----
Income before cumulative effect of
accounting change 6.0% 4.4% 5.0% 3.8%
----- ----- ----- -----
Cumulative effect of accounting for
startup costs, net of income tax benefit - - - (1.0%)
===== ===== ===== =====
Net income 6.0% 4.4% 5.0% 2.8%
</TABLE>
<PAGE> 9
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
NET SALES. Net sales for the three months ended June 30, 2000 increased
25.2% to $42.7 million from $34.1 million for the comparable 1999 period. This
increase was primarily due to the opening of eighteen salad buffet restaurants
and two Ladles restaurants since the comparable 1999 period and the increase in
comparable restaurant sales of 2.8%.
COST OF SALES. Cost of sales for the three months ended June 30, 2000
increased 24.1% to $10.8 million from $8.7 million for the comparable 1999
period. This increase was due primarily to the addition of eighteen salad
buffet restaurants and two Ladles restaurants opened since the comparable 1999
period. Cost of sales as a percentage of net sales approximated the comparable
1999 period. An increase in the overall average meal price was offset
primarily by higher food costs in new regions.
LABOR EXPENSE. Labor expense for the three months ended June 30, 2000
increased 28.4% to $13.1 million from $10.2 million for the comparable 1999
period. This increase was due to the addition of eighteen salad buffet
restaurants and two Ladles restaurants opened since the comparable 1999 period
and higher hourly wage rates. As a percentage of net sales, the labor expense
increased 0.8% to 30.8% from 30.0% in the comparable 1999 period due to an
increase in the average hourly wage rate of $.26.
OCCUPANCY AND OTHER EXPENSES. Occupancy and other operating costs for the
three months ended June 30, 2000 increased 24.6% to $8.6 million from $6.9
million for the comparable 1999 period. This was due primarily to the addition
of eighteen salad buffet restaurants and two Ladles restaurants. Occupancy and
other operating costs as a percentage of net sales approximated the comparable
1999 period. In the three months ended June 30, 2000, the Company began
experiencing increases in utility rates, primarily in Southern California.
This trend has increased and may have a greater impact on future other
operating costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended June 30, 2000 increased 36.8% to $2.6 million from
$1.9 million for the comparable 1999 period. 16.7% of this increase was due to
personnel costs, 8.8% was due to costs associated with training and management
development and 11.3% was due to other general and administrative support
costs. As a percentage of net sales, general and administrative expenses
increased 0.4% to 6.0% from 5.6% for the comparable 1999 period.
RESTAURANT OPENING COSTS. Restaurant opening costs for the three months
ended June 30, 2000 were $1.0 million or 2.4% of sales. Prior to the
implementation of SOP 98-5, in the 1999 period $.6 million of startup costs
were amortized and included in depreciation and amortization expenses.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the three months ended June 30, 2000 were $2.5 million, which
approximated the comparable 1999 period. Additional depreciation for the
eighteen salad buffet restaurants and two Ladles restaurants opened since the
comparable 1999 period, were offset by decreased amortization resulting from
the change in accounting for startup costs effective October 1, 1999, which are
now being expensed as incurred. Depreciation and amortization expense as a
percentage of net sales decreased 1.3% to 5.9%, from 7.2% for the comparable
1999.
INTEREST INCOME. Interest income for the three months ended June 30, 2000
increased to $37,000 from $14,000 for the comparable 1999 period. The increase
in interest income was due to higher cash invested during the 2000 period.
INTEREST EXPENSE. Interest expense for the three months ended June 30,
2000 increased 80% to $.9 million from $.5 million for the comparable 1999
period due to an increase in borrowing since the 1999 period.
OTHER INCOME AND EXPENSE, NET. Other income and expense for the three
months ended June 30, 2000 increased due to insurance reimbursement for the
loss of business at a San Diego restaurant, which burned down after the close
of business on December 31, 1999.
<PAGE> 10
NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
NET SALES. Net sales for the nine months ended June 30, 2000 increased
24.8% to $119.1 million from $95.4 million for the comparable 1999 period.
This increase was primarily due to the opening of eighteen salad buffet
restaurants and two Ladles restaurants since the comparable 1999 period and the
increase in comparable restaurant sales of 3.4%.
COST OF SALES. Cost of sales for the nine months ended June 30, 2000
increased 22.9% to $30.1 million from $24.5 million for the comparable 1999
period. This increase was due to the addition of eighteen salad buffet
restaurants and two Ladles restaurants since the comparable 1999 period. As a
percentage of net sales, cost of sales decreased to 25.3% from 25.7% since the
comparable 1999 period due to an increase in average meal price effective
August 1, 1999, in most regions.
LABOR EXPENSE. Labor expense for the nine months ended June 30, 2000
increased 30.2% to $37.5 million from $28.8 million for the comparable 1999
period. This increase was due to wage rate increases totaling 2.7% and
increased personnel associated with the eighteen salad buffet restaurants and
two Ladles restaurants opened since the comparable 1999 period totaling 27.5%.
As a percentage of net sales, labor expense increased 1.3% to 31.5% from 30.2%
in the comparable 1999 period due to an increase in wages, and the addition of
eighteen salad buffet restaurants and two Ladles restaurants, which due to
efficiency ramp down, utilized higher than historical labor hours during the
first ninety days of operations.
OCCUPANCY AND OTHER EXPENSES. Occupancy and other operating costs for the
nine months ended June 30, 2000 increased 24.9% to $25.1 million from $20.1
million for the comparable 1999 period. This was due to the addition of
eighteen salad buffet restaurants and two Ladles restaurants. Occupancy and
other operating costs as a percentage of net sales approximated the comparable
1999 period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the nine months ended June 30, 2000 increased 31.0% to $7.6 million from
$5.8 million for the comparable 1999 period. 15.4% of this increase was due to
personnel costs, 6.1% was due to costs associated with training and management
development, 1.8% was due to administrative startup for distribution and 7.7%
was other general and administrative support costs. As a percentage of net
sales, general and administrative expenses increased .3% to 6.4% from 6.1% for
the comparable 1999 period. This was due to additional personnel to support
new stores and distribution center startup costs.
RESTAURANT OPENING COSTS. Restaurant opening costs for the nine months
ended June 30, 2000 were $2.1 million or 1.7% of sales. Prior to the
implementation of SOP 98-5, in the 1999 period $1.7 million of startup costs
were amortized and included in depreciation and amortization expenses.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the nine months ended June 30, 2000 remained flat compared to the
1999 period. Depreciation and amortization expense as a percentage of net
sales decreased 1.5% to 5.8%, from 7.3% for the comparable 1999. Additional
depreciation for the eighteen salad buffet restaurants and two Ladles
restaurants opened since the comparable 1999 period were offset by decreased
amortization resulting from the change in accounting for startup expense
effective October 1, 1999, which are now being expensed as incurred.
INTEREST INCOME. Interest income for the nine months ended June 30, 2000
increased 46.5% to $104,000 from $71,000, for the comparable 1999 period.
INTEREST EXPENSE. Interest expense for the nine months ended June 30,
2000 increased 92.3% to $2.5 million from $1.3 million for the comparable 1999
period, due to additional borrowings since the 1999 period.
OTHER INCOME AND EXPENSE, NET. Other income and expense for the nine
months ended June 30, 2000 increased due to insurance reimbursement for the
loss of business at a San Diego restaurant, which burned down after the close
of business on December 31, 1999.
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its cash requirements principally from cash flow from
operating activities, bank debt, mortgage and capital lease financing and
equity financing. The Company does not have significant receivables or
inventory, and receives trade credit based upon negotiated terms when
purchasing food and supplies. For the nine months ended June 30, 2000, the
Company generated $14.3 million from operating activities and received a net of
$5.5 million under its bank line of credit, and $16.6 million from equipment
and mortgage financing (with repayments of $5.5 million). The Company's
principal capital requirement has been for funding the development of
restaurants. Historically the Company has primarily leased the land and
buildings for its restaurant operations, however the Company does purchase land
or land and buildings when favorable conditions are available. The Company
currently owns the land or land and buildings for 30 restaurants, including the
land for certain sites the Company expects to open in fiscal 2001. In May
2000, the Company sold the land and building for one site in a sale/leaseback
transaction which resulted in net proceeds of $2.5 million and an unrealized
gain of $130,000, which will be amortized over the life of the lease. During
the first nine months of fiscal 2000 the Company opened six owned restaurant
sites and seven leased sites. Capital expenditures totaled $32.2 million
during the first nine months of fiscal 2000 and $24.8 million for the
comparable period in fiscal 1999. As of June 30, 2000, the Company operated 79
salad buffet restaurants and two Ladles restaurants. In June 2000, the Company
closed its one small quick service restaurant located in Southern California.
The cash investment required for the thirteen salad buffet restaurants
opened during the nine month period ended June 30, 2000, was $21.7 million
including land and buildings, and excluding restaurant opening costs. The
restaurant opening costs incurred during the nine month period ending June 30,
2000 for the thirteen restaurants opened was $1.8 million. The Company has
signed 3 leases and purchased one site for sites planned to open in the fourth
quarter of fiscal 2000, and signed 7 leases, purchased 2 sites and opened 1
escrow for sites planned to open in fiscal 2001. The cash investment to open a
new restaurant typically includes the purchase and installation of furniture,
fixtures, equipment and leasehold improvements, and in the case of an owned
site, the purchase of land and a building. The Company has remaining budgeted
capital expenditures for fiscal 2000 of $4.0 million for new restaurant
openings; the Company has a remaining budgeted $800,000 in expenditures for
fiscal 2000 for capital improvements at existing sites. See "Business Risks -
Expansion Risks."
The Company will need to rely on funds generated from operations to
finance a portion of the expansion currently planned for the fourth quarter of
fiscal 2000, as well as any expansion taking place after fiscal 2000. Should
the Company's results of operations or its rate of growth fail to be adequate
to finance expansion or should costs or capital expenditures rise, the Company
may not have the ability to open new restaurants at its desired pace or at all,
and could be required to seek additional financing in the future. There can be
no assurance that the Company will be able to raise such capital when needed on
satisfactory terms or at all. See "Business Risks - Capital Requirements."
The capital expenditures, to date associated with the startup of the
distribution and delivery facility, which opened April 1, 2000, was $317,000.
The Company believes this operation in the long term will result in better
service and in on going cost savings over other distribution alternatives.
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations
include food and beverage and labor costs. Minimum wage increases have
affected earnings during the current fiscal year. Substantial increases in
costs and expenses, particularly food, supplies, labor and operating expenses,
could have a significant impact on the Company's operating results to the
extent that such increases cannot be passed along to guests.
<PAGE> 12
BUSINESS RISKS
The Company's business is subject to a number of risks. A comprehensive
summary of such risks can be found in the Company's Form 10-K. In addition to
other information in this form 10-Q, shareholders and prospective investors
should consider carefully the following factors in evaluating the Company and
its business.
CERTAIN OPERATING RESULTS AND CONSIDERATIONS
In fiscal 1998 and 1999, respectively, the Company experienced an increase
of 7.5% and an increase of 3.7% in comparable restaurant sales. In the first
nine months of fiscal 1999 and 2000, respectively, the Company's comparable
restaurant sales increased by 4.5% and 3.4%, respectively. The Company's
restaurants have not historically experienced significant increases in guest
volume following their initial opening period (15 months) due to the fact that
most sites open immediately at average or greater than average guest volume.
In addition, the Company does not believe it has significant latitude to
achieve comparable restaurant sales growth solely through price increases. As
a result, the Company does not believe that recent comparable restaurant sales
are indicative of future trends in comparable restaurant sales. The Company
believes that it may from time to time in the future experience declines in
comparable restaurant sales, and that any future increases in comparable
restaurant sales would be modest. In July 2000, the Company increased prices
in most of its markets. No assessment can be made at this time on the impact
on guest count.
EXPANSION RISKS
The Company opened ten salad buffet restaurants and one Ladles restaurant
in fiscal 1999, in new and existing regions (Pacific Northwest, Florida, North
Carolina, Texas, Georgia, Colorado and Nevada); and has opened fifteen salad
buffet restaurants and one Ladles restaurant to date in fiscal 2000, of which
thirteen salad buffet restaurants are in existing regions (Southern California,
Florida, Houston, Pacific Northwest, Colorado and North Carolina). Two salad
buffet restaurant were opened in the new region of Kansas City. The Company
currently intends to open two additional restaurants in fiscal 2000. Both
Ladles restaurants are located in San Diego, California. The Company's ability
to achieve its expansion plans will depend on a variety of factors, many of
which may be beyond the Company's control, including the Company's ability to
locate suitable restaurant sites, negotiate acceptable lease or purchase terms,
obtain required governmental approvals, construct new restaurants in a timely
manner, attract, train and retain qualified and experienced personnel and
management, operate its restaurants profitably and obtain additional capital,
as well as general economic conditions and the degree of competition in the
particular region of expansion. The Company has experienced, and expects to
continue to experience, delays in restaurant openings from time to time. The
Company incurs substantial costs in opening a new restaurant and, in the
Company's experience, new restaurants experience fluctuating operational levels
for some time after opening, including higher labor utilization during the
first ninety days. Owned restaurants generally require significantly more
upfront capital than leased restaurants, as a result of which an increase in
the percentage of owned restaurant openings as compared to historical practice
would increase the overall capital required to meet the Company's growth plans.
There can be no assurance that the Company will successfully expand or that the
Company's existing or new restaurants will be profitable. The Company has
encountered intense competition for restaurant sites, and in many cases has had
difficulty buying or leasing desirable sites on terms that are acceptable to
the Company. In many cases, the Company's competitors are willing and able to
pay more than the Company for sites. The Company expects these difficulties in
obtaining desirable sites to continue for the foreseeable future.
Since its inception the Company has closed three non-performing salad
buffet restaurants and one small quick service restaurant. Given the number of
restaurants in current operation and the Company's projected expansion rate
there can be no assurances that the Company will not close restaurants in the
future. Any closure could result in a significant write off of assets, which
could adversely affect the Company's business, financial condition and results
of operations.
RESTAURANT INDUSTRY AND COMPETITION
The restaurant industry is highly competitive. Key competitive factors in
the industry include the quality and value of the food products offered,
quality of service, price, dining experience, restaurant location and the
ambiance of the facilities. The Company's primary competitors include
mid-priced, full-service casual dining restaurants, as well as traditional
self-service buffet and other soup and salad restaurants and healthful and
nutrition-oriented restaurants. The Company competes with national and
regional chains, as well as individually owned restaurants. The number of
buffet and
<PAGE> 13
casual restaurants with operations generally similar to the Company's has grown
substantially in the last several years and the Company believes competition
among buffet-style and casual restaurants has increased and will continue to
increase as the Company's competitors expand operations in various geographic
areas. Such increased competition could increase the Company's operating costs
or adversely affect its revenues. The Company believes it competes favorably
in the industry, although many of the Company's competitors have been in
existence longer than the Company, have more established market presence, have
more experienced distribution and delivery personnel, and have substantially
greater financial, marketing and other resources than the Company, which may
give them certain competitive advantages. In addition, the restaurant industry
has few non-economic barriers to entry. Therefore, there can be no assurance
that third parties will not be able to successfully imitate and implement the
Company's concept. The Company has encountered intense competition for
restaurant sites, and in many cases has had difficulty buying or leasing
desirable sites on terms that are acceptable to the Company. In many cases,
the Company's competitors are willing and able to pay more than the Company for
sites. The Company expects these difficulties in obtaining desirable sites to
continue for the foreseeable future.
CAPITAL REQUIREMENTS
In addition to funds generated from operations and public stock offerings,
the Company will need to obtain external financing to complete its expansion
plans for fiscal year 2000 and beyond. There can be no assurance that such
funds will be available when needed. Additionally, should the Company's
results of operations decrease or should costs or capital expenditures rise,
the Company may not have the ability to open new restaurants at its desired
pace or at all, because capital may not be available.
COST SENSITIVITY
The Company's profitability is highly sensitive to increases in food,
labor and other operating costs. The Company's dependence on frequent
deliveries of fresh produce and groceries, including it's own distribution
services subjects it to the risk that shortages or interruptions in supply
caused by adverse weather or other conditions could materially adversely affect
the availability, quality and cost of ingredients. In addition, unfavorable
trends or developments concerning provisions in the Company's leases, and the
availability of experienced management and hourly employees may also adversely
affect the Company. There can be no assurance that the increases in hourly wage
rates and the availability of part- time labor will not continue to impact the
Company's ability to control costs in the future.
MINIMUM WAGE
The Company has experienced increases in the hourly wage rate due to
increases in the federal minimum wage and in the California minimum wage and
due to the tight part-time labor market resulting from historically low
unemployment levels. These increases have resulted in a decrease in the
Company's profitability. While there can be no assurance that the Company will
be able to manage and absorb these increases in the future, the Company is
exploring strategic ideas on how to better manage labor utilization in order to
minimize the impact.
IMPORTANCE OF KEY EMPLOYEES
The Company is heavily dependent upon the services of its officers and key
management personnel involved in restaurant operations, purchasing, expansion
and administration. In particular, the Company is dependent upon the
management and leadership of its four executive officers, Michael P. Mack,
David W. Qualls, R. Gregory Keller and Kenneth J. Keane. The loss of any of
these four individuals could have a material adverse effect on the Company's
business, financial condition and results of operations. The success of the
Company and its individual restaurants depends upon the Company's ability to
attract and retain highly motivated, well-qualified restaurant operations and
other management personnel. The Company faces significant competition in the
recruitment of qualified employees.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business experiences seasonal fluctuations, as a
disproportionate amount of the Company' net income is generally realized in the
second, third and fourth fiscal quarters due to higher average sales and lower
average costs. Quarterly results have been and are expected to continue to
fluctuate as a result of a number of factors, including the
<PAGE> 14
timing of new restaurant openings. As a result of these factors, net sales and
net income on a quarterly basis may fluctuate and are not necessarily
indicative of the results that may be achieved for a full fiscal year.
GEOGRAPHIC CONCENTRATION: RESTAURANT BASE
Thirty-one of the Company's eighty-one existing salad buffet restaurants
are located in California, and eighteen are located in Florida. Accordingly,
the Company is susceptible to fluctuations in its business caused by adverse
economic or other conditions in these regions, including natural disasters or
other acts of God. As a result of the Company's continued concentration in
California and Florida, adverse economic or other conditions in either state
could have a material adverse effect on the Company's business. The Company's
significant investment in, and long-term commitment to, each of its restaurant
sites limits its ability to respond quickly or effectively to changes in local
competitive conditions or other changes that could affect the Company's
operations. In addition, the Company has a small number of restaurants
relative to some of its competitors. Consequently, a decline in the
profitability of an existing restaurant or the introduction of an unsuccessful
concept could have a more significant effect on the Company's result of
operations than would be the case in a company with a larger number of
restaurants.
VOLATILITY OF STOCK PRICE
The market price of the Company's common stock has fluctuated since the
initial public offering of its common stock in May 1995. Quarterly operating
results of the Company and other restaurant companies, daily transactional
volume, changes in general conditions in the economy, the financial markets or
the restaurant industry, natural disasters or other developments affecting the
Company or its competitors could cause the market price of the common stock to
fluctuate substantially. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations. This volatility has had a
significant effect on the market price of securities issued by many companies
for reasons unrelated to the operating performance of these companies.
DISTRIBUTION CENTER
The Company's West Coast restaurant's food and supplies costs are heavily
dependent upon the results of operation and efficiency of the Company's new
distribution center. Increasing fuel costs and hourly wage rates could
adversely affect the distribution's ability to deliver groceries at favorable
costs in the future. In addition, the Company's management has little
experience operating a distribution center and may not be able to achieve cost
savings.
UTILITY COSTS
The Company is currently experiencing substantial increases in utility
costs in certain regions due in part to deregulation of utility rates. These
increases could have an impact on the Company's operating results to the extent
that such increases cannot be passed along to guests.
<PAGE> 15
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from
changes in short-term interest rates as the Company's line of credit is at the
prime rate or 20 basis points above LIBOR. The interest rate as of June 30,
2000 was 9.5%, an increase of .5% since September 30, 1999. As of June 30,
2000, the Company had $10.5 million in debt outstanding under the credit
facility, an increase of $5.5 million since September 30, 1999. Based on a
hypothetical 50 basis point adverse change in prime rates, interest expense
would increase by approximately $53,000 on an annual basis, and likewise would
decrease earnings and cash flows. The Company cannot predict market
fluctuations in interest rates and their impact on debt, nor can there be any
assurance that long-term fixed rate debt will be available at favorable rates,
if at all. Consequently, future results may differ materially from the
estimated results due to adverse changes in interest rates or debt
availability.
The Company did not have any foreign currency or other market risk or any
derivative financial instruments at June 30, 2000.
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time the subject of complaints, threat
letters or litigation from guests alleging illness, injuries or other food
quality, health or operational concerns. The Company is also the subject of
complaints or allegations from former or prospective employees from time to
time. The Company believes that the lawsuits, claims and other legal matters
to which it has become subject in the course of its business are not material
to the Company's financial position. Nevertheless, future lawsuits or claims
could result in an adverse decision against the Company that could adversely
affect the Company or its business. Additionally, adverse publicity resulting
from such allegations may materially adversely affect the Company and its
restaurants, regardless of whether such allegations are valid or whether the
Company is liable.
Item 2. Changes in Securities Not Applicable
Item 3. Default Upon Senior Securities Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders Not Applicable
Item 5. Other Information Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibits required by Item 6(a) of the report are listed in the
Exhibit Index on page 18 herewith.
(b) Report on Form 8-K:
No reports on Form 8-K have been filed by the Company during the
fiscal quarter ended June 30, 2000.
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATED:
GARDEN FRESH RESTAURANT CORP.
August 14, 2000 (Registrant)
/s/ Michael P. Mack
Michael P. Mack
--------------------
Chief Executive Officer/President
(Principal Executive Officer)
/s/ David W. Qualls
--------------------
David W. Qualls
Chief Financial Officer
(Principal Accounting and Financial
Officer)
<PAGE> 18
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 * Restated Certificate of Incorporation of Garden Fresh Restaurant
Corp.
3.2 ** Bylaws of Garden Fresh Restaurant Corp., as amended.
10.1 ** Form of Indemnity Agreement for executive officers and directors.
10.2 ** The Company's Restaurant Management Stock Option Plan, as amended.
10.3 ** The Company's Key Employee Stock Option Plan, as amended.
10.4 ** The Company's 1995 Outside Director Stock Option Plan.
10.5 ** The Company's 1995 Key Employee Stock Option Plan, as amended.
10.6 *** Form of Executive Employment Agreement
10.7 *** Wells Fargo Bank Revolving Line of Credit Note
10.8 **** The Company's 1998 Stock Option Plan (subsequently amended to
increase the share reserve to 550,000)
10.9 **** The Company's Variable Deferred Compensation Plan for Executives
10.9A **** Amendment to the Company's Variable Deferred Compensation Plan for
Executives
10.13** Park Terrace Office Park lease between the Company and Park
Terrace Partners dated November 1, 1991
10.14***** Indemnification Agreement between the Company and David Qualls,
Greg Keller, and Michael Mack dated April 28, 1998.
27.1 Financial Data Schedule
________________________
* Incorporated by reference from Exhibit 4.1 filed with the Company's
Registration Statement on Form S-8 (No. 33-93568) filed June 16, 1995.
** Incorporated by reference from the Exhibits with corresponding numbers
filed with the Company's Registration Statement on Form S-1 (No. 33-
90404), as amended by Amendment No. 1 to Form S-1 filed on April 19,
1995, Amendment No. 2 for Form S-1 filed May 8, 1995, Amendment No. 3
to Form S-1 filed May 15, 1995, Exhibit 10.2 is incorporated by
reference from Exhibits 10.2 and 10.2A, Exhibit 10.3 is incorporated by
reference from Exhibits 10.3 and 10.3A and Exhibit 10.5 is incorporated
by reference from Exhibit 10.5 and 10.5A.
*** Incorporated by reference from the Exhibits with corresponding numbers
filed with the Company's Form 10-Q filed with the SEC on February 13,
1998.
**** Incorporated by reference from the Exhibits with corresponding numbers
filed with the Company's Form 10-Q filed with the SEC on April 28,
1998, as amended by Amendment No. 1 to Form 10-Q filed on April 28,
1998, Amendment No. 2 for Form 10-K filed on August 13, 1999, and
Amendment No. 3 for Form 10-Q filed on December 29, 1999.
***** Incorporated by reference from the Exhibits with corresponding numbers
filed with the Company's Form S-1 (No. 33-51267) filed with the SEC
on April 29, 1998.
